{"id":130,"date":"2014-12-12T10:06:10","date_gmt":"2014-12-12T15:06:10","guid":{"rendered":"http:\/\/www.goodwoodfunds.com\/dev\/?p=130"},"modified":"2019-09-01T10:09:26","modified_gmt":"2019-09-01T14:09:26","slug":"interview-with-peter-puccetti-chris-currie-and-curt-cumming","status":"publish","type":"post","link":"https:\/\/www.goodwoodfunds.com\/index.php\/2014\/12\/12\/interview-with-peter-puccetti-chris-currie-and-curt-cumming\/","title":{"rendered":"Interview with Peter Puccetti, Chris Currie and Curt Cumming"},"content":{"rendered":"\n

How to reinvigorate companies you buy<\/a><\/p>\n\n\n\n

Finding hidden value in overlooked assets <\/h2>\n\n\n\n

When Goodwood Funds takes an activist stake in a company, its managers don\u2019t wait for the stock market to reward their position. Instead, they remake companies to highlight their worth to potential purchasers.<\/p>\n\n\n\n

The firm loves unrecognized assets, says president Curt Cumming. \u201cIt could be real estate or a division that we think could be spun off. When the market isn\u2019t paying attention to a redundant asset, that\u2019s an opportunity for us to shine a light on it and increase the company\u2019s value.\u201d<\/p>\n\n\n\n

Passive management has also brought the firm success. The Goodwood Milford Fund, helmed by portfolio manager Chris Currie, won second place at the 2014 Canadian Hedge Fund of the Year Awards in the Best Five-Year Return category. Created in 2006, the fund invests in high-interest corporate bonds and takes long and short positions on North American equities.<\/p>\n\n\n\n

With a compound annual return of 16.63% since inception, investors who put $100,000 into the fund in 2006 would have $389,210 as of October 31, 2014, while the S&P\/TSX Composite would have returned $166,493. Goodwood has more than $100 million in assets under management, Cumming says. We spoke to Cumming, Currie and Peter Puccetti, chairman and CIO.<\/p>\n\n\n\n

Q: Why is your approach attractive to institutional clients?<\/h2>\n\n\n\n

Cumming: Goodwood uses a private equity approach to public markets. We\u2019re similar to private equity because we have concentrated positions and a longer-term approach.<\/p>\n\n\n\n

We have a non-correlated approach to value investing, and we seek to avoid the value trap risk: something can be inexpensive, but that doesn\u2019t mean the price is going up. You need a catalyst to unlock that value. It can be something that\u2019s brought about by the market, a macroeconomic event, or a company-specific event, such as a planned divesture of an asset. However, when those events aren\u2019t happening and the company is non-receptive to those opportunities, Goodwood will communicate the shareholders\u2019 desire for corporate change.<\/p>\n\n\n\n

Q: What is your hedge-fund investing style?<\/h2>\n\n\n\n

Puccetti: The firm looks for undervalued companies and work with management to improve the firm. But activist situations come in different shades. It can be everything from back-channel communications, such as having a one-on-one conversation with the board, to running a proxy contest to change the composition of the board. We\u2019ve done 10 proxy fights, which probably makes us the most prolific Canadian activist investor. But we don\u2019t focus on that. Historically, 10% to 15% of our positions have been activist. A more typical situation would be trying to identify something that we think is fundamentally cheap, and where we think there are some catalysts.<\/p>\n\n\n\n

Q: What research goes into an activist position?<\/h2>\n\n\n\n

Puccetti: The fundamentals are almost identical for a passive or active position. But an activist position takes a lot more effort because, after making an investment, it involves phone calls, letter writing, and talking to lawyers and other shareholders.<\/p>\n\n\n\n

One position we\u2019re known for happened in 2007. The company was ATS Automation. ATS was a basket case. It had value: wonderful customer relationships and a long track record, but it suffered from mismanagement. So, quarter- by-quarter, you never knew if you were going to have a win or a loss. Divisional managers were calling the shots on all sorts of important decisions when they didn\u2019t have the whole picture. If someone hadn\u2019t have gotten involved, the company would have eventually disintegrated.<\/p>\n\n\n\n

We, along with U.S. hedge fund Mason Capital, replaced ATS\u2019s board. My partner Cam MacDonald, two people from Mason and I went on the board. We fundamentally changed the business. We found a new CEO, Anthony Caputo, who has managed to grow business and make smart acquisitions. Anthony was the COO at SPAR Aerospace, and was a proven operator in a troubled situation. He\u2019s totally revamped ATS. The things that used to be done in a haphazard way before were centralized.<\/p>\n\n\n\n

It used to be that the 23 different plans each bought their own material. They would sometimes bid against each other, without even knowing it, for an exotic piece of material they needed for a customer contract. Amongst the many things he did, Anthony put an end to that. He put in a centralized buying group and took advantage of ATS\u2019s scale to get concessions on pricing from those materials suppliers.<\/p>\n\n\n\n

Probably the single best thing you can do in most cases is to find a good CEO. Then there are other kinds of activist situations, such as small-cap companies, where we\u2019ve done proxy fights and become management.<\/p>\n\n\n\n

We did that most recently at Dacha Strategic Metals, where we turned all the assets to cash. Unfortunately, Dacha was a disappointment, because rare earth metal prices went down. Our cost was about 24 cents in 2012, and in August 2014 we liquidated the assets for 18 cents. After costs, we realized about $12 million.<\/p>\n\n\n\n

At the time, we looked at roughly 61 ideas about what to do with the public listing and cash, including technology, mining, oil and gas, and healthcare. When you\u2019re in control of a public vehicle with no operating business but a decent amount of cash (which I would define as being $10 million to $50 million), everybody calls you with deals. Doing a reverse takeover, rolling their business into a public shell and being assured of the cash, makes their efforts to get public a lot less risky, and more likely.<\/p>\n\n\n\n

We decided on a transaction with a Canadian, publicly traded pharmaceutical company called Merus Labs. We gave Merus our cash for their shares to help them finance an acquisition. We think there\u2019s a lot of upside from here on in, but the Dacha cash proceeds were less than we were hoping for, frankly.<\/p>\n\n\n\n

Goodwood\u2019s picks<\/h2>\n\n\n\n

Amaya Gaming Group<\/h3>\n\n\n\n

Symbol:<\/strong> AYA
Approximate purchase price November 2013:<\/strong>$7.48
Price November 2014:<\/strong> $37.45
Founded:<\/strong> 2004, Quebec
What:<\/strong> Casino, online poker, betting, slot machine and lottery technology provider, with contracts in North America, Europe and Latin America.<\/p>\n\n\n\n

ATS Automation<\/h3>\n\n\n\n

Symbol:<\/strong> ATA
Approximate purchase price 2007: <\/strong>$4.00
Price November 2014:<\/strong> $14.38
Founded:<\/strong> 1978, Ontario
What:<\/strong> Manufacturer of automated factory machines, consumer electronics, transportation components and healthcare devices, with factories in North America, Europe and Asia.<\/p>\n\n\n\n

Great Canadian Gaming Corporation<\/h3>\n\n\n\n

Symbol:<\/strong> GC
Approximate purchase price 2006:<\/strong> $11.50
Price November 2014:<\/strong> $21.50
Founded:<\/strong> 1986, B.C.
What:<\/strong> Casino, racetrack, theatre and hotel operator, with 17 properties in Western Canada, Ontario, Nova Scotia and Washington State.<\/p>\n\n\n\n

Note: Investment statistics as at Nov. 18, 2014.<\/strong><\/p>\n\n\n\n

Sources: Amaya Gaming Group; ATS Automation; Great Canadian Gaming Corporation; Goodwood Funds; Google Finance<\/p>\n\n\n\n

Q: When do you sell a company, or become less involved with it?<\/h2>\n\n\n\n

Puccetti: Sometimes in six months. Other times, I\u2019ve held positions for seven or eight years. The reason I haven\u2019t sold ATS, for example, is we\u2019re on the cusp of what it could become. Caputo\u2019s made improvements, but M&A is going to drive the stock higher. They\u2019ve made strides in their ability to acquire and integrate businesses.<\/p>\n\n\n\n

Q: Could you give me an example of one of your passive investments?<\/h2>\n\n\n\n

Puccetti: Our second-biggest position is in Great Canadian Gaming Corporation. It\u2019s the largest physical facility gaming company in Canada. Traditionally, gaming has been a high-margin business with tremendous ability to produce free cash flow, which we love. The company is using its free cash flow to buy back stock instead of paying dividends. That\u2019s shrunk the number of shares outstanding, so there are fewer shareholders with whom to divvy up the spoils.<\/p>\n\n\n\n

That piqued our original interest, and we happened to know the fellow who became CEO three years ago, Rod Baker. We have a lot of respect for his abilities. He\u2019s focused, cautious, always plans for worst-case scenarios and watches the downside. He has a background in being a successful investor and executive.<\/p>\n\n\n\n

And it\u2019s fundamentally a good business to be in. For example, its main market is British Columbia, where the company\u2019s headquartered. The British Columbia Lottery Corporation provides incentives for operators to make capital expenditures on their facilities. For those dollars spent on capital expenditures, the government\u2019s cut of gaming revenue is reduced to allow for faster payback on that investment. It\u2019s also a regulated business, so the barriers to entry are high\u2014it\u2019s difficult for new competitors to enter the market.<\/p>\n\n\n\n

Q: How do bonds fit into a hedge fund strategy?<\/h2>\n\n\n\n

Currie: We primarily short equities. But, we might short government bonds if, for example, we feel interest rates could rise in the near future. A 100% equity or 100% bond fund can be volatile, so we try and reduce volatility with hedging. We don\u2019t see an immediate near-term rise in interest rates, so we\u2019re not shorting yet.<\/p>\n\n\n\n

Q: On the bond side, are there indicators you look at in the company?<\/h2>\n\n\n\n

Currie: A number of those factors are similar to what a stock analyst would use, but instead of looking at the price-to-earnings ratio, we look at the spread over government bonds. For instance, we own Amaya Gaming Group\u2019s bond, which has a 7.5% coupon and matures in 2016. The equivalent Government of Canada bond might be 1%, so this has a spread of 650 basis points.<\/p>\n\n\n\n

Then, we would analyze whether the corporate bond is six times as risky as a government bond. We\u2019d talk to the rating agencies about it (though this one happens not to be rated). Then we look at the credit environment: Is the economy getting better? How\u2019s the stock market doing? Can the company generate positive credit events, such as raising the equity capital that makes it more likely to pay off interest and principal?<\/p>\n\n\n\n

We\u2019d look at comparable companies and the company\u2019s growth prospects. We look at leverage: Is the company able to pay the bond off at maturity, or will they have to refinance it? Most Canadian companies manage their leverage well, and their long-term debt isn\u2019t more than two years of cash flow. When it gets higher than that, you have to look into it. Is it temporary or permanent? Is cash flow falling? Are they adding debt recklessly? When a company adds more debt, it\u2019s going to add more interest expense unless the cash flow is growing, and it\u2019s going to have more difficulty making interest payments.<\/p>\n\n\n\n

Q: When would you short a company?<\/h2>\n\n\n\n

Cumming: There needs to be a valuation mismatch, and a catalyst that will revert that stock to its proper value. It could be improper accounting or outright fraud, or the stock could be overhyped and the real value is considerably less than where it\u2019s trading.<\/p>\n\n\n\n

We have a net-long bias. When you\u2019re long and own a company, there\u2019s an infinite amount of potential capital gains. On the short side, you\u2019re limited to 100%. So if you buy something at $10, it can go up forever, but if you short something at $10, it can only go to zero. There\u2019s also more capital chasing long investment styles. For those reasons, we choose to go net long.<\/p>\n\n\n\n

by Jessica Bruno<\/strong>, content editor of Advisor Group.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

How to reinvigorate companies you buy Finding hidden value in overlooked assets When Goodwood Funds takes an activist stake in a company, its managers don\u2019t wait for the stock market to reward their position. Instead, they remake companies to highlight their worth to potential purchasers. The firm loves unrecognized assets, says president Curt Cumming. \u201cIt …<\/p>\n

Interview with Peter Puccetti, Chris Currie and Curt Cumming<\/span> Read More »<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"default","ast-global-header-display":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","footnotes":""},"categories":[1],"tags":[],"class_list":["post-130","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.goodwoodfunds.com\/index.php\/wp-json\/wp\/v2\/posts\/130","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.goodwoodfunds.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.goodwoodfunds.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.goodwoodfunds.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.goodwoodfunds.com\/index.php\/wp-json\/wp\/v2\/comments?post=130"}],"version-history":[{"count":1,"href":"https:\/\/www.goodwoodfunds.com\/index.php\/wp-json\/wp\/v2\/posts\/130\/revisions"}],"predecessor-version":[{"id":131,"href":"https:\/\/www.goodwoodfunds.com\/index.php\/wp-json\/wp\/v2\/posts\/130\/revisions\/131"}],"wp:attachment":[{"href":"https:\/\/www.goodwoodfunds.com\/index.php\/wp-json\/wp\/v2\/media?parent=130"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.goodwoodfunds.com\/index.php\/wp-json\/wp\/v2\/categories?post=130"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.goodwoodfunds.com\/index.php\/wp-json\/wp\/v2\/tags?post=130"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}